Iceland Crisis and Causes Led to the Crisis

Iceland and the rest of the world reeling. In retrospect Iceland was essentially operatinglike a flying with a risquely unvi subject growth model. However, the semipolitical relationship between Iceland and Britain in addition greatly added to the scotch downturn and m integritynesstarycrisis. Britains delectation of anti-terrorism laws, in an attempt to protect their frugal coronations in Iceland, essentially labeled Iceland as a terrorist state which onlycontinued to stagnate the influx of strange dandy.Although without a uncertainty the primarycause of the Icelandic monetary crisis was economic, political factor ins such as therelationship and interdependence between Iceland and Britain exacerbated the alreadydire situation. Iceland began as an isolated, fairly necessitous land whose survival was based generally on its fishing trade. 1 However, in recent age Iceland had been successfulat establishing itself as a premier offshore banking hub. At one top Iceland ers wereecstatic and celebrated the fact that their small uncouth of about 300,000 people had 3 banks in the worlds grandst 300 banks. 2The Icelandic establishment was able to entice outside investors by setting engross rates very laid-back, which encouraged extraneousers toinvest by and large in monetary assets. The large inflow of unconnected capital associated with suchmass hostile investment caused the krona to greatly appreciate. Since the krona wasgreatly overvalued it do all imports in both goods and function very inexpensive for Icelanders the overvalued krona as well make it a lot easier for Icelanders to scoop up moneyfrom abroad. 3 The high interest rates, big capital inflow, and an appreciatedcurrency all aided in creating the economic boom that Iceland enjoyed for many years ?This economic boom encouraged Icelanders to soak up from abroad and many failed toforesee that such economic prosperity was limited and that a stop is inevitably going tofollow a boom. The miss of governance oversight on the banking dust also was an economicfactor that led to the fiscal crisis. peerless large problem with the Icelandic banking arena is that the banks became so large that the Icelandic governing body was unable to operate asa lender-of-last-resort simply because Iceland with its sheer 300,000 people has a verysmall tax base. 4 At the end of 2006 the total assets of its banks grew to be nine times aslarge as the countries GDP. It would pass been less of a problem for the banks to be solarge if they had not remained domiciled in Iceland. It was perhaps to a fault large and ideal of a culture for such a small country like Iceland to become an international fiscal center. Iceland was essentially acting like a whole when indeed they should set about been lookingafter the economic stability of their whole country. The Icelandic political sympathies simplylacked the ability to financially sustain their banks in times of economic cri sis. If some of the banks in Iceland had foreign lenders-of-last-resort they powerfulness guide been able toweather out the economic storm.Icelands economic growth model was mainly construct upon foreigninvestors existence able and willing to slip away on giving. However, due to the international economiccrisis foreign capital ceased coming in and when it did the non-finite of public and privatedebt became quite evident. ? 6 nearly analysts argue that problems with the krona have prevented Iceland from being able to control the financial crisis. Since Iceland does not have an effectual currency to fudge they are mostly unable to harbor the banks andhave no practical ways to tote up down the inflation and interest rates, which have beenstaying in the double digits. This is just one of the many economic situations currentlyaffecting Iceland. Without a doubt the prime cause for Icelands financial crisis is largely theeconomic circumstances previously discussed. However, pol itical factors such asIcelands relationship with Britain also played a role in exacerbating the crisis and preventing Iceland from any chance it might have had of financial viability. Iceland andBritain once had a very mutually beneficial friendship, which could be seen in that theywere NATO allies and frequent transaction partners.However, as the global economic crisis began to borrow hold this friendship became tenuous at best. The problems between Icelandand Britain began in late 2008 when Britain, in an attempt to protect its financial assets inIceland, grow its 2008 anti-terrorism laws to freeze the British assets of a weaknessIcelandic bank. 8 Specifically Britain froze the assets of Landsbanki and seized the assetsof Kaupthing Singer & Friedlander. 9 The British seizure of Kaupthing Singer &Friedlander was followed shortly by the collapse of its parent bank, Kaupthing, which theIcelandic government had desperately been trying to keep viable.In many Icelanderseyes and su rely in the eyes of the Icelandic government Kaupthing was the last of theMohicans and its demise signaled the end of the Icelandic banking system ? The political decision to lambast anti-terrorism legislation against Iceland essentially branded it as a terrorist state, which in the eyes of either Icelander was athorough abuse of a small neighbor. payable to this one political action Iceland was listed onthe British Treasury Departments foliate with terrorist groups and states such as Al Qaeda,Sudan, and uniting Korea. 11At this point in the crisis the foreign capital inflows intoIceland were already dismal only when this British action triggered an immediate freeze on anyremaining banking transactions between Iceland and abroad. Essentially no one wants todo business with a terrorist state. professorship Olafur Ragnar Grimsson stated that, It(Britain) was perfectly being a bully against a small country because I am absolutelycertain that if it was the case of France and Ger many, the British government would nothave acted in the same way- absolutely not. The Icelandic Prime diplomatic minister at the time,Geir H.Haarde, believed that Gordon Brown had sacrificed Iceland for his own short political gain thereby play a grave situation into a national disaster. 12 From the panorama of the Icelandic government their once cordial, friendly relationship withBritain had been thoroughly abused to the point that a British foreign indemnity decision played an integral factor in the meltdown of the Icelandic financial area Undoubtedly Britains political decisions affected the financial crisis in Iceland,yet, the Crisis in Iceland also greatly impacted Britains economic conditions.Like therest of the world, thanks to the downturn of the global economy Britain has beensuffering its own financial woes. When foreign capital inflows ceased in Iceland thiscaused the kronas value to fall, which led Icelandic banks to be unable to finance their debts most of which are in foreign currency. This realization by all of the foreigninvestors who were once so bore to invest created a mad mass to get their money out of the failing Icelandic banks.Unfortunately, Icelandic banks did not have proper reservesto cover the massive withdrawals starring(p) all three of Icelands banks to be nationalized. 13 Regrettably many British universities, municipal governments, charities and hospitals had been lured in by the high interest rates to invest in Icelandic accounts. CambridgeUniversity had $20 zillion invested in Icelandic accounts while 15 British police forceshave approximately $170 million frozen in Iceland. 14Many groups that had invested inthe Icelandic banking vault of heaven had done so in the thingmabob of their own home states by the use of online investment funds sites such as Icesave. co. uk. On their website Icesavenow displays the nub that We are not currently impact any deposits or withdrawal requests through out Icesave Internet acco unts. We apologize for anyinconvenience this may cause our customers. 15 Certainly for large investors such asCambridge University this is much more than a small inconvenienceAt the center of Icelands financial troubles is that their banking sector was highlydependent upon a continued inflow of foreign capital. In turn, Icelands foreign investorswere also very dependent upon Icelands banks to maintain their viability. However,when the inflow of capital stop the interdependence of Iceland and its investors became very clear. This is exemplified by the Icelandic-British relationship. Britishcitizens and companies alike had been ensorcelled by the call the of high interest rates inIceland.The viability of the banks was based largely on the ability to keep foreign capitalcoming into the country, which allowed the krona to appreciate. When the foreign creditmarket froze and investment diminish drastically the financial interdependence of Iceland and Britain manifested itself Icelands m ain pitfall and cause of its financial crisis is that they essentiallytreated their country as a firm and allowed the banking sector to get far withal hugeconsidering, as we have seen, that it had no financial stronghold to back it up.Althoughthe blown-up banking sector and other economic factors created the financial crisis it wascertainly exacerbated by the failed diplomatic relationship between Iceland and Britain. Britains use of its antiterrorism legislation only made the economic woes of Icelandworse by essentially reservation it a pariah that should be avoided by the rest of theinternational community. In the end, Icelands financial practices had sown the seeds of their own destruction but the political actions of Britain ensured that it would be a old before Icelands financial sector will germinate once more.